Do any of your Canadian employees travel to the U.S. on business? For example, do you have employees who cross the Canada-U.S. border to solicit sales by attending trade shows or meeting with customers? Or to provide a service, such as training or installing a product on a customer’s premises? Where applicable, U.S. tax obligations may apply.
Employee assignments in the United States
In effect, a Canadian employer who temporarily assigns an employee to the U.S. will have to pay U.S. withholding taxes to the extent that the employee is taxable in the U.S. on wages earned in the U.S.
U.S. taxable income
Under U.S. law:
A Canadian company that temporarily assigns an employee to the U.S. is not required to withhold U.S. withholding taxes from the employee’s wages for services rendered in the U.S. if :
- the work is performed by a non-U.S. resident for a period or periods not exceeding, in the aggregate, 90 days during the tax year; and
- total salary earned in the U.S. does not exceed US$3,000.
Under the Canada-U.S. tax treaty:
However, a Canadian company that assigns an employee to the U.S. without having a permanent establishment there can benefit from the Canada-U.S. tax treaty.
Indeed, in such a situation, the Canadian employer could avoid the obligation to withhold U.S. income tax to the extent that the proportion of income earned in the U.S. by the employee is less than $10,000 per year.
If this U.S.-source employment income exceeds $10,000 per year, the employer may still be exempt from its U.S. withholding obligations if:
- the employee was present in the United States for less than 183 days in any twelve-month period beginning or ending during the year; and
- the employee’s salary is not paid by a U.S. employer or by a Canadian company with a permanent establishment in the United States.
Please note, however, that this exemption may apply at the federal level only, as states do not automatically apply the benefit of the tax treaty. It is important to check the tax rules of the state where the services are rendered.
Employer and employee obligations
Form 8233 “Exemption from Withholding on Compensation for Independent and Dependent Personal Services of a Nonresident Alien Individual”.
Even if the employee is exempt under the Canada/U.S. Tax Treaty, he or she must duly complete Sections I, II and III of Form 8233, sign it and return it to his or her employer, if his or her remuneration exceeds the basic exemption threshold of $3,000 set by the Internal Revenue Service (“IRS”).
The employer must complete Section IV of Form 8233, sign it and send it to the IRS.
This personal income tax return will disclose wage income earned in the U.S., but will also allow you to apply for tax-exempt status under the Canada-U.S. tax treaty. In addition, in some cases, Form 8840 “Closer Connection Exemption” may be required, to avoid U.S. taxation of the employee’s worldwide source income, due to the employee’s closer ties to Canada.
Failure to file the above-mentioned declarations may result in penalties imposed by the IRS. It is important to note that the U.S. Custom and Border Protection Service and the IRS are currently expanding their electronic collaboration capabilities. An increasing number of border services officers are starting to ask questions about tax filing. This is why the tax compliance rules explained in this Tax Bulletin must be respected in the future, to avoid restricting passage through U.S. customs for Canadian employees, and the penalties that go with it.
If you have any questions about this tax memo, please contact a member of our international tax team.
Demers Beaulne’s U.S. Assignment Information Bulletin addresses international tax issues affecting Canadians and non-residents alike. It is of a general nature and aims to deal with cross-border issues in the field of taxation. Please note that this bulletin is not intended to replace professional advice.
The International Tax Services team de Demers Beaulne is able to provide advisory services on international tax issues, from both a Canadian and international perspective, including cross-border acquisitions and restructurings, financing, repatriation and exit strategies, expatriate services, tax compliance services and U.S. and Canadian tax returns.
